Life Insurance Crooks

Benjamin M. Lawsky, New York’s superintendent of financial services, said that life insurers based in New York had alone burnished their books by $48 billion, using what he called “shadow insurance,” according to an investigation conducted by his department. He issued a report about the investigation late Tuesday.

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Insurance is regulated by the states, and Mr. Lawsky said his investigators found that life insurers in New York were seeking out states with looser regulations and setting up shell companies there for the deals. They then used those states’ tight secrecy laws to avoid scrutiny by the New York State regulators.

Insurance regulation is based squarely on the concept of solvency – the idea that future claims can be predicted fairly accurately and that each insurer should track them and keep enough reserves on hand to pay all of them. The states have detailed rules for what types of assets reserves can be invested in. Companies are also expected to keep a little more than they really expect to need – called their surplus – as a buffer against unexpected events. State regulators monitor the reserves and surpluses of companies and make sure none fall short.

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The transactions at issue are modeled after reinsurance, a business in which an insurance company pays another company, a reinsurer, to take over some of its obligations to pay claims. Reinsurance is widely used and is considered beneficial because it allows insurers to spread their risks and remain stable as they grow. Conventional reinsurance deals are negotiated at arm’s length by independent companies; both sides understand the risk and can agree on a fair price for covering it. The obligations drop off the original insurer’s books because the reinsurer has picked them up.

Mr. Lawsky’s investigators found, though, that life insurance groups, including some of the best known, were creating their own shell companies in other states or countries – outside the regulators’ view – and saying that these so-called captives were selling them reinsurance. The value of policies reinsured through all affiliates, including captives, rose to $5.46 trillion in 2012, from $2.82 trillion in 2007.

The chief problem with captive reinsurance, Mr. Lawsky said, is that the risk is not being transferred to an independent reinsurer. Also, the deal is not at arm’s length. And confidentiality rules make it difficult to see what secures the obligations.

The New York State investigators subpoenaed this information and discovered that some states were approving deals backed by assets that would not be allowed in New York; Mr. Lawsky referred to “hollow assets,” “naked parental guarantees” and “conditional letters of credit.”

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Insurers, unlike banks, have no prepaid fund like the Federal Deposit Insurance Corporation to make customers whole in the event of a collapse. That’s why Mr. Lawsky said he feared that taxpayers might have to be called to the rescue again.

Learning from the sweet — and largely unprosecuted — techniques of their pals in the financial-services industry, it appears that the moguls, poobahs, and panjandrums in the insurance industry are finding their own special ways to game the entire system into the poorhouse.

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You think any of these guys looked at what happened in 2008 and thought, “Boy, those guys really were crooks and bought the country a helluva catastrophe. We should learn from them and not do that ourselves.” Nope, I guarantee you the first thoughts among the people who thought up this scam for the insurance companies was, “Holy crap, look at the dough those guys made!” And I guarantee you those same people all got raises. The upper levels of American capitalism is so rotten with amorality, so utterly devoid of any conventional sense of ethics, let alone social responsibility, that it hardly seems worth pointing it out any more. Congratulations to America’s graduate schools of business. You have bred three generations of vampires to feed on the rest of us. It’s as though every medical school in the country adopted the basic approach to thoracic surgery of Sweeney Todd and married it to the economic philosophy of Bialystock And Bloom.